North Sea Oil and Gas Industry

Motion made, and Question proposed, That this House do now adjourn[Mr. Ainger.]

9.59 pm

Mr. Alistair Carmichael (Orkney and Shetland):
I should remind the House that my entry in the Register of Members' Interests indicates that earlier this year, I was fortunate enough to receive hospitality and transportation in respect of the offshore northern seas exhibition in Stavanger, which was sponsored by the United Kingdom Offshore Operators Association.

As luck would have it, this is a timely debate for the offshore oil and gas industry. This is a very delicately poised time for the industry, as there is, frankly, the prospect of significant decline. If that prospect is left unchecked, decline could turn into disaster. Much remains to be seen about what can be done by the industry and the Government, not least in partnership together.

The situation has already started to impact in my constituency. At the Sullom Voe terminal in Shetland, there has already been a round of redundancies, and contractors and subcontractors have also started to reduce their numbers. In a community such as Shetland, the loss of jobs from a place such as Sullom Voe has an especially severe impact. These are good, well-paid, skilled and professional jobs. The installation also has significant spin-offs for harbour provision and towage in Shetland. Once such jobs are lost, the people who held them will also tend to leave the community, so the constant drip of depopulationthe great threat that always hangs over communities such as ourswill continue.

There are not many alternatives in Shetland. The local authority, which is one of the other significant local employers, is also looking to cut numbers. After the time I spent in Brussels at the European Commission yesterday, I do not have any confidence that there will be a prospect of employment in the white fish industry for many of the people who are affected. Much of what is happening today was predicted by the industry at the time of the changes made in the Budget and was also referred to at the ONS exhibition earlier this year.

I should say that I am not seeking to visit all the ills of the industry on the Government. In particular, the Budget changes will not clearly be all bad for the industry. I share the conclusion drawn by Professor Alex Kemp of Aberdeen university, my alma mater, at the end of last week when he published his North sea study, occasional paper No. 89, XThe Impact of the 2002 Tax Changes on the UK Continental Shelf". I do not know whether the Minister has had the benefit of reading that document. If not, I certainly commend it to him as an excellent piece of academic research. Professor Kemp concludes that older fields and marginal projects within mature fields will benefit, but only as a result of the royalty abolition. That is the first point that I would wish the Minister to address.

The Government are currently undertaking consultation on the abolition of royalty. It might be slightly ungenerous to say this, but although they have been meticulous in their consultation on the abolition of royalty, would that they had taken the same careful

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approach to the introduction of the corporate tax increase in the first place. It is one of those unfortunate things that measures that are of benefit seem to be capable of being introduced only after careful preparation, while those of detriment seem to be much more easily sprung on the industry.

Sir Robert Smith (West Aberdeenshire and Kincardine):
For the record, I also visited the offshore northern seas exhibition in Stavanger, and I declare an interest as a shareholder in Shell.

I want to reinforce the point about royalties. Many of my constituents and people in the industry have put it to me that abolishing royalties is not simply about the figure, which is not that great in terms of the tax take through the 10 per cent. charge. The crucial point is to fulfil a promise that the Chancellor made and to restore confidence to an industry that suffered the shock of the way in which the tax was originally introduced.

Mr. Carmichael:
I agree with my hon. Friend. Abolishing royalty is the thread on which the Government's credibility with the industry hangs. It is important that an announcement is made early. I hope that the Minister can inform us of the consultation's progress and when we might expect a decision.

Mr. Alex Salmond (Banff and Buchan):
Does the hon. Gentleman know that the latest forecast for total exploration wells drilled this year is 12? That is half of last year's total and much less than was expected at the beginning of the year. Does that not show that any tax change that the Government want to introduce should have been accompanied by an incentive for further exploration drilling? The change means not only lost jobs now but lost development and lost tax revenues in future.

Mr. Carmichael:
The hon. Gentleman makes an important point. One of my main anxieties is that the package will create imbalance in the industry on the United Kingdom continental shelf. Without money and effort being put into exploration now, there will be no mature fields to benefit in three, five or 10 years' time. I shall consider that in more detail later.

If the abolition of royalties is the silver lining, we should not forget that a dense black cloud surrounds it. The position is producing an imbalance, and there is already evidence of the deferral of investment, which the UKOOA and many Liberal Democrat Members predicted during the Budget debates. I am sure that the Economic Secretary knows that UKOOA's annual survey of 28 UK offshore oil and gas producing companies' investment and development plans was published yesterday. It was undertaken with the Department of Trade and Industry. It describes the current position as having

Xreached a critical point in terms of its international competitiveness, with projections of investment growth not being matched by increased production volumes."

The survey says much about the current position in the industry. I want to highlight two statistics in the

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report. They relate to the point that the hon. Member for Banff and Buchan (Mr. Salmond) made. The report states:

XThere are 64 fewer new field developments planned for the future compared to last year's survey findings (84 as opposed to 148 in 2001)."

Secondly, the report states:

XTotal UK oil and gas production for the period . . . to 2010 is forecast to be an estimated 12.9 billion

barrels of oil equivalent,

Xsome 370 million boe lower than predicted twelve months ago".

That elegantly illustrates the point of the hon. Member for Banff and Buchan that the Department of Trade and Industry clearly recognises the need to bring new entrants to the UK continental shelf. However, that is hindered by the taxation policy that the Treasury promotes.

The great need in an industry such as offshore oil and gas is for continuity and stability. The overall picture that the UKOOA report painted is of a genuine threat to that. Extraction of oil and gas from the North sea is not quick and easy, but fraught with danger. Before coming to Parliament, I was a solicitor and I dealt with several people who had been injured in offshore accidents, as well as with families of people who had sadly been killed as a result of such accidents. The environment is highly challenging and hostile. Extraction therefore involves a steady stream of work in developing new fields. Investment now will bring benefits in three years' time or well beyond that period.

There are other anomalies that need to be addressed. One particular concern for meI hope that the Minister may have something to say about it when he repliesis the taxation on tariff income deriving from the use of infrastructure. It is a curious position. For mature fields with pipelines coming in from Miller, for example, there is 70 per cent. taxation. For newer non-taxable fields, it is now at 40 per cent. For brand new pipelines such as those that would be bringing gas into this country from Norway, to hark back to the ONS exhibition at Stavanger, the Minister for Energy and Construction was keen to trumpet the signing of a concordat with the Norwegian Government to make this a realitythe tariff on these pipelines is to be taxed at 30 per cent.

I believe that damage has been done to the industry by the taxation increases in the Budget. When historians come to review this period, I think that they will come to the view that the real damage was done by the Government. I shall hark back to some of Professor Kemp's estimates. I believe that he estimates that the peak of the tax take will be #1 billion barely this year, and thereafter it will be on a declining tariff. Given the loss of confidence in the Government among the industry and the damage that they have done to the long-term prospects for the offshore industry on the UK continental shelf, it may ultimately be seen to have been an expensive filling of a gap in a Budget. It is all so regrettable because it is all so unnecessary. The Government's standing had been increasing since 1997. The manner in which they operated the pilot project was exemplary. All that was thrown away on one afternoon.

The industry considers that the real villain of the piece is the Treasury. That is why I framed my application for an Adjournment debate in a way that meant that we might have a Treasury Minister rather than a Minister

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from the Department of Trade and Industry to respond to it. I canvass the idea that there is a need for Treasury Ministers to be involved at the highest level of PILOT. I understand that currently only DTI Ministers are involved, although I understand that the sub-groups involved officials from the Treasury. If there is to be a repairing of the relations between the industry and the Governmentit is crucial that there isthat would be the most obvious first step.

It is my real concern that the full effects of the changes in taxation that arise from the Budget are not yet apparent. First, I am concerned that the changes may have a bearing on the health and safety of workers in the industry. It seems almost inevitable, that from a mainland perspective, operators in the North sea are out of sight and out of mind; they are working in tighter margins, and on older fields there will be pressure to compromise on safety. We all know the dire consequences that that can have. I lived in Orkney at the time of the Piper Alpha disaster and I well remember the accommodation module being brought in to the Flotta terminal to be opened. That will remain with me for the rest of my life. We can have no compromise on safety in the North sea because it can be disastrous in human terms.

My other concern is about the working time directive, from which the offshore oil and gas industry is exempt. The unions are pressing to have it applied to the industry. I broadly favour that, because I do not see why in principle offshore workers should be treated differently from anybody else, but as long as the margins are squeezed as they are at present and as long as there is an imbalance in the industrywith the emphasis on mature fields and not on developing new onesI can see little prospect of its happening. I am anxious to give the Minister time to answer the points that I have made, so I shall conclude my remarks.